ANALYSIS: Long-term investing - Millennials can do better
File Image:IOL File Image:IOL
Althouth millennials are good savers, when it comes to long-term investing towards retirement, they don’t do that well, says Noluvoyo Betela, client relationship manager at Alan Gray.
Betela said several studies have shown that, compared with the older generation, millennials are good savers, but when it comes to investing for retirement, only 44 percent are saving through an employer or provident fund.
“This is a sobering finding when you consider that only 6 percent of South Africans who are currently employed will be able to retire comfortably. The rest will likely have to keep working past retirement age or rely on a meagre government pension.
“If we are not putting away money to create long-term wealth, what are we saving for? The most common goals are travel, our education, a deposit for a car, and starting a business. Saving for these goals is the right approach, as you are not relying on credit that will cost you more in the long run.
“However, if you are not prioritising long-term investing, especially to create wealth, there is a real risk that over time your hard-earned money will lose its buying power as it fails to keep up with inflation,” says Betela.
She says that by not taking a long-term approach, consumers are missing out on compound interest.
According to David Weare, franchise principal at Momentum Consult, careful financial planning and a basic understanding of finances are imperative to avoid making costly mistakes that can have a profound and long-lasting impact on your life.
“With any person, it is important to look at your life stage and assess what your financial needs are. When it comes to the youth, some aspects are more pertinent, so it is important that you always start with a financial plan that takes into account your risk cover, investments and savings,” says Weare.
He says that one of the biggest challenges is getting young people to think of their retirement at the start of their careers.
“Having a good retirement plan in place early in life could make the world of difference in the long term to an individual. But is one of the hardest things you can expect from a young person. That’s why it’s so important for you to look at what your priorities are and realise that long-term planning is critical,” says Weare.
Betela says there are several reasons many find it challenging to save, including low starting salaries, debt, asset deficit, the “black tax” and conspicuous consumption.
Betela provides answers to some common excuses for not saving:
* “I don’t have enough money to save.” Saving has nothing to do with how much you earn, but everything to do with the percentage of your income that you spend. Whether you make R4 000 or R40 000 a month, the only way to save is to spend less than that amount.
* “I have too many expenses.” Many South African millennials are first-generation middle class, and a large portion of their expenses goes towards playing asset catch-up: buying cars, homes and household appliances that are in place or are handed down in established middle-class families. Many end up in debt as a result.
If you can, consider living with your family a little longer while you accumulate everything you need for your own home. If you have access to safe and affordable public transport, you should consider holding off on buying a car and instead save towards one, or at least to put down a substantial deposit that will lower your monthly repayments.
* “I have to take care of my family.” Research has found that as many as 70 percent of South Africans working in the major cities are supporting family members, or believe they will have to in future.
With careful planning, you can structure your finances in such a way that you are still able to support yourself and others. Sit down with your financial dependants and give them a clear picture of your finances. This will set clear boundaries and help you to manage their expectations, and your budget.
* “I don’t have access to a pension or provident fund.” Here’s the good news: you don’t have to rely on an employer to save towards retirement. If you are an entrepreneur or a freelancer, you can use a retirement annuity to save on your terms. Depending on your financial provider, you can also start, pause or stop your contributions at any time.
* “I can start later.” As with most things in life, procrastinating can seriously derail your goals and plans. Say you wanted to have R100 000 in 10 years.
If you began saving today, you could achieve this with R500 a month.
If you delay for five years, you would have to put away R1 300 a month to achieve your goal in time.